News Archives: December, 2013

ICI's latest "Trends in Mutual Fund Investing, November 2013" shows that money fund assets increased by $4.8 billion in November, after decreasing by $11.5 billion in October (and increasing for 3 straight months prior to this, up $46.7 billion in September, $20.4 billion in August and $26.8 billion in July). (Money funds assets also fell in each of the first four months of 2013, rose in May then fell in June.) YTD through 11/30, ICI shows money fund assets down by $19.8 billion, or 0.7%. The Institute's November asset totals show a continued rebound in stock fund assets and continued outflows from bond funds (down $23.7 billion in Nov.). Money fund assets have skyrocketed in December and in the latest week, rising by $56.0 billion month-to-date through Dec. 27 and by $46.0 billion in the week through Friday. Finally, ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which verify a drop in Repo, Agencies and CP, and jumps in CDs and Treasuries. (See Crane Data's December 10 News, "CDs, Treasuries Surge While Repos, Agencies Plunge in Nov. Holdings.")

ICI's November "Trends" says, "The combined assets of the nation's mutual funds increased by $183.4 billion, or 1.3 percent, to $14.815 trillion in November, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an outflow of $18.12 billion in November, compared with an outflow of $15.62 billion in October [and an outflow of $11.58 billion in September]."

It adds, "Money market funds had an inflow of $5.35 billion in November, compared with an outflow of $12.12 billion in October. Funds offered primarily to institutions had an inflow of $7.93 billion. Funds offered primarily to individuals had an outflow of $2.58 billion." ICI's "Liquid Assets of Stock Mutual Funds" remained at 3.8% as stock funds continue to hold razor thin reserves of cash.

ICI's Portfolio Holdings for Nov. 2013 show that Repos declined by $23.7 billion, or 4.9%, (after falling $15.1 billion in Oct.) to $459.1 billion (19.0% of assets). Repos have fallen to become the third largest segment of taxable money fund portfolio holdings behind CDs and Treasuries. Holdings of Certificates of Deposits, still the largest position, rose by $19.8 billion to $555.3 billion (23.0%). Treasury Bills & Securities became the second largest segment with an increase of $16.9 billion to $477.5 billion (19.8%).

Commercial Paper, which fell by $7.9 billion, or 2.1%, remained the fourth largest segment ahead of U.S. Government Agency Securities. CP holdings totaled $368.5 billion (15.3% of assets). Agencies fell by $10.6 billion to $344.7 billion (14.3% of taxable assets). Notes (including Corporate and Bank) fell by $1.4 billion to $92.7 billion (3.8% of assets), and Other holdings rose by $164 million to $85.8 billion (3.6%).

The Number of Accounts Outstanding in ICI's Holdings series for taxable money funds decreased by 95,759 to 24.029 million, while the Number of Funds fell by 2 to 385. The Average Maturity of Portfolios was flat at 49 days in Nov. Over the past year, WAMs of Taxable money funds have declined by one day.

Note that Crane Data publishes daily asset totals via our Money Fund Intelligence Daily and monthly asset totals via our Money Fund Intelligence XLS. ICI publishes its weekly "Money Market Mutual Fund Assets" summary, as well as the monthly asset totals. Each data set and time series contains slight differences among the tracked universes of money market mutual funds. Crane also publishes monthly Money Fund Portfolio Holdings and calculates a monthly Portfolio Composition totals from these (we recently updated our December MFI XLS to reflect the 11/30 composition data and maturity breakouts), while ICI collects a separate monthly Composition series.

We mentioned a recent blog post by economists from the New York Federal Reserve last week in a "Link of the Day," but we wanted to do more on the article, "The Fragility of an MMF-Intermediated Financial System." Written by Marco Cipriani, Antoine Martin, and Bruno Maria Parigi," it explains, "Since the financial crisis of 2007-09 -- and, in particular, the run on prime money market funds (MMFs) in September 2008 -- policymakers have been concerned that the funds' fragility may render banks themselves more susceptible to risk. For instance, in a recent article and speech arguing in favor of MMF reform, New York Fed President Bill Dudley stated that MMF fragility may contribute to financial market systemic risk. The idea that the susceptibility of MMFs to runs may make the financial system more unstable seems intuitive, but is it correct? In this post, we show that the idea isn't only intuitively appealing, it's also sound from an economic theory standpoint: MMF fragility is indeed a concern for the stability of the banking system and a contributing factor to financial market systemic risk."

The economists write, "Traditionally, banks have financed their investments in loans and long-term securities by collecting demand deposits from both households and corporations. In recent decades, however, U.S. banks have also increasingly relied on funding from other financial intermediaries, such as MMFs. As we discuss in an earlier post, MMFs collect money from large institutional and retail investors in order to provide short-term funding to the financial sector and to banks in particular. In the United States, they're a significant player in the short-term funding market. The funds managed approximately $2.5 trillion in assets at the end of 2012. As the table below shows, MMFs held 43 percent of financial commercial paper, 29 percent of certificates of deposit, and 33 percent of repo agreements."

They continue, "In the United States, deposits are insured up to $250,000; so bank deposits by institutional and wholesale investors are often not fully insured. As a result, these investors need to limit their exposure to a single banking institution and diversify their portfolio of deposits. One way for investors to limit their bank exposure is by depositing their funds directly in several banks. We show how this can be achieved in the exhibit below: The arrows denote the investments into a bank as well as the cost to the investor to find and monitor those banks in which he invests. We can call this banking structure diversification through direct finance."

The post states, "Intermediation through MMFs allows investors to achieve the same diversification gains as they do through direct finance, while at the same time saving on monitoring and search costs. In the next exhibit, we show a financial economy similar to that of the one above, although intermediated through MMFs. Investors deposit their money in an MMF, which in turn invests it in several banks. Intermediation through the MMF allows investors to reduce their exposure to the bankruptcy of a single banking institution. Since MMFs deposit their funds in banks on behalf of several clients, they save the search and monitoring costs that each investor would otherwise have to pay on his own."

Under a section entitled, "Informed Investors and the Fragility of MMF-Intermediated Finance," the piece tells us, "Before a bank run, at least some of a bank's assets usually become impaired. Of course, as assets become impaired, investors learn about it over time. They become "informed." In a direct-finance banking system, investors would withdraw their funds from their bank as they learn about its trouble. As a result, unless all investors learn about the trouble at the same time, the bank loses its investor base somewhat gradually."

It continues, "In contrast, in an economy intermediated through MMFs, investors who are aware that an MMF is investing in troubled banks will withdraw their funds from the MMF itself. This is indeed what happened to U.S. MMFs in 2011, as investors redeemed their MMF shares out of concern for the funds’ investment in European banks. Remember that MMFs collect investments from a large number of investors, and invest their funds in banks and other financial institutions. As informed MMF investors redeem their shares, MMFs become aware that some of their own investments -- for instance, short-term funding to a bank -- are in trouble. Because of this, they may withdraw their funds en masse from a bank, precipitating a run that wouldn't have happened otherwise. Since MMFs collect funds from investors, the MMFs will learn from their redemptions when investors are informed."

The three speculate, "Accordingly, even a piece of bad news that only few investors have access to may lead to large withdrawals of funds from the banking system. In other words, MMFs act as an amplification mechanism. Whereas under the traditional banking model the slow withdrawal of funds from a bank may be manageable, the rapid drying up of funds from MMFs and other wholesale funds providers may be fatal to a bank. The bank may be forced to sell its assets at "fire-sale" prices, thereby worsening both its own balance sheet and that of other financial institutions. As a result, MMF intermediation may contribute to the fragility of the financial system by making it more prone to runs and contagion."

They say of "The Way Forward," "We make this argument more formally in a recent staff report. We show that MMF intermediation allows investors to limit their exposure to a single bank and reap the gains from diversification. However, a banking system intermediated through MMFs is more unstable than one in which investors interact directly with banks. The mechanism through which instability arises is the information that MMF investors have on bank assets, which is learned by MMFs and leads them to withdraw en masse from a bank."

Finally, the NY Fed blog comments, "Our results underpin the idea that an MMF-intermediated financial system can be particularly fragile. This fragility has been the main driver of the recent industry regulatory efforts by the Securities and Exchange Commission. In recent decades, banks have relied more and more on financial intermediaries, such as money markets funds, to finance their investments. However, our findings suggest that this trend, while providing investors with valuable diversification, may increase the instability of the banking system."

Below, we excerpt the second half of our December "Fund Profile," "Northern Challenges Clients to Rethink Cash: Peter Yi Interview". (See yesterday's "News" for Part I.) We write: MFI: What are your customers concerned about these days? Yi: There is no doubt that our investors have questions surrounding the recent SEC proposals introduced back in June. Specifically, they are concerned with how the new proposals will impact their traditional use of money market funds. They are concerned with situations where they cannot access their cash when they need it. They also have concerns surrounding the accounting and the tax treatment of their money market fund holdings if segments of the industry move to a variable NAV. The regulatory uncertainty at the very least gives them reason to pause and reflect on how they use money funds and are willing to see what other liquidity solutions we can offer.

MFI: How are fee waivers impacting Northern's money funds? Is Northern committed to the business? Yi: Without question, Northern Trust is committed to the money market business. Money fund waivers have certainly been gaining a lot of attention over the last few years and have made managing money funds more challenging. But having robust money market offerings, which are guided by our conservative investment philosophy, is something that our clients appreciate and expect as part of our investment suite and service model. Northern Trust is a customer-centric organization so the products that our clients value the most will guide our business strategies.

MFI: Do you guys manage ultra-short bonds or enhanced cash? How about separately managed accounts or securities lending reinvestment pools? Yi: We offer a full range of short duration products and strategies. We have a very long history managing ultra-short fixed income funds that are synonymous with what the industry refers to as "enhanced cash." While we have been managing ultra-short strategies since the late 1980's, we have seen incredible growth in this asset class over the last few years. We launched our first ultra-short fixed income mutual funds in 2009 and the AUM has grown exponentially since then. The continued success of Northern Trust's ultra-short strategies validates our view that clients value a strong and proven investment process in a total return product that is different than a traditional money market fund.

For money market-like strategies, we also offer offshore Global Cash Funds, separately managed accounts and securities lending reinvestment pools that are managed consistently with our registered 2a-7 money market funds. What resonates most with our investors for these products is our conservative investment philosophy that emphasizes credit research and risk management.

MFI: Tell us about your offshore funds and the European environment. Yi: We manage a full suite of Dublin-based offshore Global Cash Funds offered in multiple currencies (USD, GBP & EUR). Our Global Cash Funds fall under the UCITs directive and follow the strict standards imposed by the IMMFA Code of Practice. Northern Trust's offshore Global Cash Funds would be considered under scope for the European money market regulation proposal by the European Commission (EC). The EC proposals are being viewed as much more punishing than what is currently being proposed by the SEC. At a very high level, the EC proposals require European money market funds to either establish a 3% NAV capital buffer using a constant NAV or alternatively, operate under a variable NAV. While the implications for some of the provisions are concerning, we also believe the EU process is much slower than in the US and we expect a vigorous debate within the individual parliaments.

MFI: What is your outlook for the coming year and the future of money funds? Yi: From a portfolio management perspective, we expect the interest rate environment will continue to present a challenging operating environment. The overall supply constraint themes will continue to play out in an unfavorable way. Our expectation is that monetary policy will continue to be incredibly accommodative. Even if the Federal Reserve [continues] to taper its large scale asset purchase program in 2014, our view is that the target fed funds rate will remain near zero. If the universe of high quality issuers continues to shrink, we would expect spreads to grind even tighter, putting pressure on the economics of the money fund business. While we think it's manageable for Northern Trust, it will have repercussions within the industry, favoring more consolidation. In addition, we are hopeful that we will get more clarity around the regulatory proposals for money market funds around the spring of next year. Regardless of what is ultimately adopted, we think the money market sector will continue to exist and serve a valuable purpose within the financial system.

MFI: Is there anything you'd like to add? Yi: We think what differentiates Northern Trust is that we take an intelligent solutions-based approach to cash management. We focus on a segmentation strategy that defines and allocates cash into different buckets. We challenge our clients to really "rethink cash" in a way that optimizes their expectations for risk, liquidity and return criteria. We offer our clients the opportunity to segment their cash into three distinct buckets: operational cash, reserve cash and strategic cash.

Operational cash is used for short-term spending needs. Reserve cash is for intermediate spending needs, and strategic cash is for longer term cash needs. Each segment has different characteristics with different risk, return and liquidity expectations. Our "rethink cash" approach has really engaged our clients in a meaningful way. It's been a powerful framework to get clients to better align their expectations for liquidity, risk and return. Because at the end of the day, cash can be a very expensive insurance policy, and there could be a more optimal way for our clients to manage their cash if they have flexibility.

Below, we excerpt the first half of our latest "Fund Profile," "Northern Challenges Clients to Rethink Cash: Peter Yi Interview".... This month Money Fund Intelligence interviews Peter Yi, Senior Vice President and Director of Money Markets at Northern Trust. Northern is the 11th largest manager of money funds with over $73 billion in U.S. money market funds. Our Q&A follows.

MFI: How long has Northern been involved in running money funds? Northern Trust has been managing money market funds since the 1970's when Northern created its first cash sweep vehicle in our trust department. We have been doing this for a long time and continue to be very committed to the money market business. We are now managing about $225 billion in AUM across various money market and short duration products and strategies. History tells us that experience and leadership are critical for the money market business and has served us well in successfully navigating tumultuous times.

MFI: What is your biggest priority currently? What are you working on? We spend a lot of time thinking of the future, performing deep analysis and forecasting on how the money market industry will evolve. Our view is that liquidity is valued in any market cycle, and so we feel very good about our business model and how we are positioned. As of late, we have been investing a great deal of time focusing on the regulatory proposals for money market funds. We believe the money market landscape will change and so we are ensuring that Northern Trust is nimble enough to adapt quickly.

Aside from the regulatory debates, one strategic focus has been on our ultra-short product offerings. Investors have been drawn to our ultra-short fixed income strategies as some money market investors seek more yield while core fixed income investors position for higher interest rates at some point. We believe the ultra-short fixed income space will continue to gain traction.

MFI: What's the biggest challenge in managing money funds today? Supply dynamics in the money market sector will be the major challenge in the intermediate to long term, as issuers and investors respond to regulatory change at the same time the financial system deleverages on a large scale. Money market portfolio managers are very focused on high quality issuers within short maturity instruments.

However, the broader theme of deleveraging in the financial system will make it much more difficult to source high quality financial instruments that were traditionally available to money market funds. The sensitivity to regulatory metrics such as capital and leverage ratios will continue to strain issuance. In addition, issuers, globally, are being driven to be less reliant on short term wholesale funding and motivated to seek longer term liabilities. Meanwhile, ever since the 2010 SEC money market amendments were adopted, money market funds have been mandated to seek shorter-maturity instruments. We expect that these conflicting mandates will continue to be challenging.

MFI: What are the funds buying now? What aren't they buying? We have been focused on constructing a credit barbell strategy. In that strategy, we have been purchasing credit in shorter maturities and taking duration in longer government securities. Even for our prime funds, we are maintaining a strong overweight to government securities. With short term interest rates anchored at zero for the next few years, short term credit spreads remain very tight, if not the tightest of the year. The relative value for government securities has become much more compelling to us. We have also been seeking high quality foreign agencies and supra-nationals when those opportunities present themselves.

Within the credit sectors, we have a preference for the Canadian and Australian banking sectors. These two sectors have performed very well throughout the recent crises. They continue to be well capitalized and have emerged from the credit crisis as the strongest institutions.

As we wrote last Wednesday (Crane Data News "Vulnerabilities Remain in Money Funds, Cash, Says OFR Annual Report"), the U.S. Department of the Treasury's Office of Financial Research (OFR) recently released its "2013 Annual Report, which "identifies threats to financial stability and tools to monitor them." Below, we excerpt more from the report, this time focusing on "The Supply and Demand for Short-Term Funding." The OFR report says, "Investor runs on short-term funding instruments played a critical role in the recent financial crisis. Private sources provided liquidity and credit backstops in short-term funding markets. When investors doubted the safety of those guarantees, they quickly withdrew their funding, and this stress was transmitted and amplified through the financial system. Although those markets have stabilized, they remain vulnerable to runs and fire sales. Analysis is important to ascertain the nature of such vulnerabilities."

It explains (starting on page 50), "This section describes a preliminary analysis of the supply and demand for short-term funding instruments and markets. Following tradition, we analyze the uses or demand for short-term funds -- the ways that issuers use money-like liabilities to fund longer-term assets. We also analyze the sources or supply of such funds -- the characteristics of the purchasers and the nature of their preference for such money market instruments. Focusing on both sources and uses highlights gaps both in the available data and in the analysis of economic forces that drive the market for money market instruments."

The report continues, "Financial intermediaries often finance long-term, illiquid investments with short-term, liquid liabilities, such as commercial paper and repos. Nonbank financial companies using such short-term funding vehicles may be exposed to runs and other vulnerabilities as the activities of liquidity and maturity transformation create potential mismatches, and their funding instruments aren't protected by deposit insurance or access to liquidity from the central bank. Creditors worried about the creditworthiness of their claims may withdraw funding, potentially resulting in significant losses that can lead to fire sales and failure. The recent financial crisis highlighted these vulnerabilities."

It tells us, "To reduce the apparent risk and cost of credit in such liquid funding vehicles, issuers made use of private credit and liquidity guarantees -- such as bank-provided, standby lines of credit for commercial paper. During the crisis, investors realized that those guarantees could be withdrawn or had doubts about the capacity of private firms to provide such guarantees. Liquidation of opaque, risky collateral by nonbank intermediaries promoted fire sales, which were intensified by runs on their funding sources, resulting in a dramatic, rapid deleveraging, and contraction in both sides of balance sheets."

The OFR adds, "Despite that shrinkage, securitization and short-term, wholesale funding vehicles remain important features of a market-based financial system. More than 60 percent of credit transactions are intermediated outside insured depository institutions. New requirements for higher capital and liquidity by traditional banks and their parent holding companies may create incentives to move activities to more lightly-regulated institutions. Accordingly, analysis of short-term funding markets remains an important aspect of financial stability monitoring. In this preliminary analysis, we examine both the borrowers who use short-term funding and the investors who supply it. However, the data available to describe and quantify the short-term funding marketplace are not sufficiently detailed to create a complete picture of both supply and demand. We identify the nature of these gaps and suggest ways to fill them."

The report discusses "Market-Based Financing and Money Market Instruments," saying, "Market-based financing, or credit intermediation outside the commercial banking system, gave rise to financial stability concerns during the crisis. In this analysis, we focus specifically on the demand for, and supply of, money-market instruments that were considered "cash-equivalents" before the crisis. Investors held such assets in their portfolios because of their apparent low risk and high liquidity. Nonbank financial intermediaries conducted transformation of maturity, credit, and liquidity by creating or issuing such money-like liabilities. As noted earlier, however, these entities do not have explicit access to central bank liquidity or public sector guarantees (see Pozsar and others, 2012). So when these nonbank firms came under stress, investors ran. Analyzing both the demand for, and supply of, such instruments helps in understanding the risk of runs in short-term, wholesale funding markets."

It says, "Money market instruments are large-denomination debt instruments with low credit risk and short maturity (less than one year, and often less than one week). Demand for these instruments reflects a natural preference by many investors for liquidity, the ability to exchange their investments for cash on short notice at a particular price. Because of their short maturity and low credit risk, money market instruments are treated by many investors as though they guarantee payout at full or par value. Investors in money market instruments include retail investors. They also include institutional cash pools -- large, short-term cash balances of nonfinancial corporations and institutional investors (see Pozsar, 2011). Institutional cash pools allow a wide variety of financial firms, nonfinancial companies, foreign official sector investors such as central banks, and institutional investors such as mutual funds and pension funds to invest their surplus cash. Money market instruments include short-term obligations of the U.S. Treasury (Treasury bills) and commercial banking short-term obligations, such as uninsured certificates of deposits (large CDs), as well as short-term liabilities of shadow banks."

The OFR Annual Report continues, "From the perspective of investors in money market instruments, Treasury bills and short-term obligations of commercial banks are close substitutes for the short-term liabilities of shadow banking. However, there is a crucial difference: Treasury bills are backed by the full faith and credit of the U.S. government, and even uninsured large CDs of commercial banks are backstopped by access to the Federal Reserve's discount window. In contrast, shadow banking liabilities, which typically offer higher yields, are usually backed only by private -- not public -- guarantees. In some cases, these private guarantees may be provided by commercial banks, but even in such cases, nonbank liabilities are more distant from public sector backstops."

It adds, "Investors in money market instruments run when shocks trigger fears of default and prices of these instruments decline sharply, undermining the belief that the instruments can be redeemed at par. To avoid the adverse effects on the real economy from historical bank runs and subsequent failures of banks, governments have long chosen to provide banks with access to the lender of last resort and deposit insurance, while subjecting them to prudential regulation to reduce the moral hazard associated with this access. Absent such backstops, run risk is present in any short-term liability that finances a (even slightly) longer term asset. But different types of short-term instruments -- commercial paper, repos, money fund shares -- have different degrees of run risk. For example: If even a small money market fund breaks the buck, it can trigger a run on similar funds, which occurred with the Reserve Primary Fund on September 16, 2008."

A press release entitled, "DTCC Provides The Industry With a Blueprint to Drive Down MMI Settlement Processing Risks posted last Thursday tell us, "The Depository Trust & Clearing Corporation (DTCC) today published a detailed plan for proposed enhancements to its settlement processing for money market instruments (MMIs) to improve intraday settlement finality and further reduce credit and liquidity risk in the MMI market. DTCC, through its depository, The Depository Trust Company (DTC), will enhance its settlement model to eliminate risks associated with intraday reversals of transactions in DTC's MMI system that are the result of issuer failure. Subject to regulatory approval, the proposed changes are detailed in a service description paper entitled "Increasing Certainty and Promoting Intraday Settlement Finality.""

Andrew Gray, DTCC managing director, Core Business Management, comments, "DTCC continually examines how to further reduce risk in the financial system and the proposed changes to MMI transaction processing aim to help eliminate the credit risk that IPAs still face today."

The release explains, "Under the current MMI model, Issuing and Paying Agents (IPA) banks, who act on behalf of issuers, can instruct DTC to issue a "refusal to pay" for its maturity obligations up to 3 p.m. EST when the IPA has not received adequate funding from the issuer. In the event of a "refusal to pay," DTC will reverse all valued transactions processed for the designated issuer on the current day. MMI reversals compromise intraday settlement finality and create uncertainty for clients. The proposed MMI settlement model will require changes to DTC's "refusal to pay" procedures and to current market practices by investors, issuers, custodians, placement agents dealers and IPAs. These changes will allow MMI transactions to be processed intraday for end-of-day net funds settlement and without the risk of reversal prior to settlement, currently associated with a "refusal to pay.""

Daniel Thieke, DTCC managing director and general manager of Settlement and Asset Services, tells us, "DTCC has played a key role in the growth and expansion of the MMI market by providing significant settlement efficiencies in the processing of these instruments. DTCC is committed to strengthening intraday settlement finality and reducing risk exposure to help better protect and preserve the MMI market and the integrity of the financial system."

DTCC explains, "The paper outlines some of the key benefits gained from the enhanced model, including: Mitigating credit and liquidity risks associated with intraday MMI transaction reversals; Increasing transparency of issuer funding for investors, their custodians and IPAs; and Maintaining the current level of intraday and end of day liquidity requirements for DTC clients."

They add, "In the wake of the financial crisis, DTCC and the Securities Industry and Financial Markets Association (SIFMA) formed the MMI Blue Sky Task Force ("the Task Force") to evaluate the strengths and weaknesses of the current MMI settlement system and work collaboratively to develop ways to further reduce risk in the processing of these transactions. In 2012, the Task Force created a model to eliminate intraday reversals of MMI transactions in the DTC system and has since further defined the concept, outlined in the DTCC service description paper."

The DTCC release continues, "In addition, DTCC supports the CPSS-IOSCO Principles for Financial Market Infrastructures, which state that Financial Market Infrastructures should promote final settlement intraday or in real time. To comply with these guidelines, DTC seeks to modify the current MMI process that allows an IPA to issue a "refusal to pay," which triggers a reversal of MMI deliveries prior to settlement. CPSS-IOSCO stands for the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO)."

Finally, it adds, "The MMI enhancements are also referenced in two DTCC white papers published in December 2012: "A Roadmap for Promoting Intraday Settlement Finality in U.S. Markets" and "Reducing Risk and Enhancing Intraday Finality in the Settlement of Money Market Instruments." A detailed description of the proposed MMI enhancements can be read in its entirety here: http://www.dtcc.com/news/2013/december/19/mmi-service-description.aspx."

The Federal Reserve's latest Z.1 "Financial Accounts of the United States" (formerly the "Flow of Funds") statistical data set for the Third Quarter of 2013 was released last week, and the four tables it includes on money market mutual funds continue to show that the Household sector, funding corporations (securities lenders), and nonfinancial corporate businesses remain the largest investor segments and that Time and Savings Deposits have surpassed SecurityRPs (repo) as the largest investment segment. Table L.206 (on page 93) shows the Household sector with $1.094 trillion, or 41.5% of the $2.637 trillion held in Money Market Mutual Fund Shares as of Q3 2013. Household shares increased by $42 billion in the 3rd quarter, and they've risen by $50 billion over the past 12 months. But Household sector money fund assets still remain well below their record level of $1.582 trillion at yearend 2008.

Funding corporations, which includes securities lenders, remained the second largest investor segment with $510 billion, or 19.3% of money fund shares. Their assets increased by $32 billion in the latest quarter, but fell by $98 billion over the past 12 months. (Funding corporations held over $1.025 trillion in money funds at the end of 2008.) Nonfinancial corporate businesses, the third largest investor segment, have gained on the No. 2 spot, according to the Fed's data series, with $456 billion, or 17.3% of the total. (These assets increased by $19 billion in the latest quarter and increased by $29 billion the past year.)

Private pension funds increased their money fund holdings dramatically over the past 12 months (though 9/30/13); they now rank fourth with $148 billion (5.6%), an increase of $52 billion over 12 months. State and local governments ranked fifth in market share among investor segments with 5.4%, or $142 billion (up $16 billion over 12 mos.), while the Rest of the world category ranked in sixth place with 4.5% of assets ($119 billion). Nonfinancial noncorporate businesses held $80 billion (3.0%), State and local government retirement held $43 billion (1.6%), Life insurance companies held $24 billion (0.9%), and Property-casualty insurance held $22 billion (0.8%), according to the Fed's Z.1 breakout.

The Fed's Z.1 Table L.120 (page 83) shows `Money Market Mutual Fund Assets largely invested in Time and savings deposits ($494 billion, or 18.7%), Security RPs ($489 billion, or 18.5%) and Treasury securities ($467 billion, or 17.7%). Money funds also hold large positions in Open market paper (we assume this is CP, $358 billion, or 13.6%), Agency and GSE backed securities ($354 billion, or 13.4%), and Municipal securities ($305 billion, or 11.6%). The remainder is invested in Corporate and foreign bonds ($89 billion, or 3.4%), `Foreign deposits ($36, or 1.4%), Miscellaneous assets ($34 billion, or 1.3%), and Checkable deposits and currency ($11 billion, or 0.4%).

In the 12 months through Sept. 30, 2013, Time and savings deposits (up $89 billion), Open market paper (CP, up $39 billion), Municipal securities (up $33 billion) and Agencies (up $23 billion) showed large increases, while "Miscellaneous" (down $31 billion) and Security RPs (down $24 billion) showed large declines. (We're not aware of a detailed definition of the Fed's various categories, so aren't sure in some cases how to map some of these figures against other data sets.)

In other news, Federated Investors, the third-largest manager of money market funds and one of the most vocal opponents of radical regulatory change, ran a full-page advertisement on page A10B of Wednesday's Wall Street Journal. Titled, "No to floating NAV for Money Market Funds," it listed a series of "Money Market Advocates," including: the U.S. Conference of Mayors, National Association of State Treasurers, Government Finance Officers Association, Association for Financial Professionals, U.S. Chamber of Commerce, and the American Council of Life Insurers.

The ad says, "Each organization and more than 1,400 other commenters have gone on the record to oppose the floating net asset value (NAV) for money market mutual funds in response to the SEC request for comments. In fact, more than 98% of the comments received by the SEC rejected the floating NAV. Users know money market funds are well-regulated, based on sound and widely accepted accounting principles, transparent, and enhance capital market efficiency."

Dechert's Financial Services Group writes in a new "OnPoint," a piece entitled, "SEC Charges an Investment Adviser and a Portfolio Manager with Fraud and Causing a Money Market Fund to Violate Rule 2a-7." The update, written by Jack Murphy, Stephen Cohen, and Brenden Carroll, explains, "The U.S. Securities and Exchange Commission (SEC) recently instituted public administrative and cease-and-desist proceedings against Ambassador Capital Management, LLC, a Detroit-based registered investment adviser (ACM), and one of its employees who served as the primary portfolio manager of the Ambassador Money Market Fund (Fund). The SEC alleges that ACM and the portfolio manager deceived the Fund's board of trustees (Board) and caused the Fund to violate Rule 2a-7 under the Investment Company Act of 1940 (1940 Act), the rule governing money market fund investments and operations." (See Crane Data's Nov. 27 News, "SEC Charges Ambassador Money Mkt. Fund Portfolio Manager With Fraud".)

It explains, "This OnPoint describes the role of the SEC's Division of Investment Management (Division) in uncovering the alleged fraud through an analytical review of the Fund's performance data and portfolio information. It then discusses the alleged fraudulent conduct and other alleged violations of the federal securities laws. Finally, the OnPoint suggests possible measures that can be taken to detect (and, perhaps, prevent) the types of conduct alleged by the SEC."

Under a section entitled, "Enhanced Analysis of Money Market Fund Data by the SEC's Division of Investment Management," Dechert writes, "According to the SEC press release, the enforcement action "stem[med] from an ongoing analysis of money market fund data by the SEC's Division of Investment Management, in this case a review of gross yield of funds as a marker of risk." The Order stated that, as of October 2011, the return of the Fund "significantly exceeded" the returns for prime money market funds in its peer group. Moreover, the Order noted that the Fund held, among other things, the securities of a non-U.S. issuer after it had been taken into receivership, as well as asset-backed commercial paper of a troubled German bank and two Italian issuers. These concerns prompted further examination by the SEC's Office of Compliance Inspections and Examinations (OCIE), which, after an on-site examination, referred the matter to the Asset Management Unit of the SEC's Division of Enforcement."

They add, "The SEC's press release credited the "ongoing quantitative and qualitative analysis of the asset management industry" by the Division's Risk and Examinations Office as playing a "vital role" in this enforcement action. Moreover, Norm Champ, the Division's Director, stated that "this [enforcement action] is an excellent example of how [the SEC's] investment in data analysis leads directly to investor protection." ... While the SEC Staff has long considered factors such as comparative fund performance when monitoring the money fund industry, the availability of these analytical tools, combined with the detailed data regarding the portfolio holdings of money market funds filed on Form N-MFP, has enhanced the ability of the SEC and its Staff to detect aberrational performance and to monitor the investments of money market funds and their compliance with Rule 2a-7."

Dechert says of the "SEC's Allegations Against ACM and the Portfolio Manager," "The SEC alleges that ACM and the portfolio manager violated the federal securities laws by repeatedly and knowingly making false or misleading statements to the Fund's Board regarding (i) the level of credit risk of the Fund's portfolio securities.... The Order also alleged that ACM had caused the Fund to violate certain requirements under Rule 2a-7, in addition to the failure to make required determinations that portfolio securities present minimal credit risks."

Among the "Lessons for Money Market Fund Advisers and Boards," the alert explains, "This enforcement action by the SEC clearly demonstrates what many in the industry had already realized -- that the increased transparency of money market fund portfolios due to website posting and filings of Form N-MFP, combined with the enhanced ability of the SEC Staff to analyze portfolio data and monitor for aberrational Fund performance, has dramatically increased the effectiveness of the Staff's oversight of money market funds."

Dechert adds, "As a result of this new level of efficiency (and to make sure that the SEC will not bring to their attention issues of which they are unaware), fund advisers may wish to review their compliance processes to assure themselves (and their funds' Boards) that: 1. any compliance issues that may arise under Rule 2a-7 will be identified and dealt with on a timely basis; 2. any fund performance that is materially higher than that of similar funds is promptly reviewed to ensure that such outperformance is not the result of investments that do not comply with Rule 2a-7, the fund's (and the adviser's) procedures under that rule or the investment parameters disclosed in the fund's prospectus and [SAI]."

Finally, they write, "In addition, money market fund advisers may wish to consider having their money market fund portfolio management team meet with the fund's Board to discuss the manner in which the fund is managed and the steps taken to assure that the fund is operated in compliance with Rule 2a-7. Although this enforcement action has not been settled and is part of an ongoing proceeding, the allegations made by the SEC and the manner in which the investigation was commenced are illustrative of the enhanced effectiveness of the SEC's ability to monitor the money market fund industry. In light of this, advisers and Boards should consider reexamining their policies, procedures and practices to ensure that their funds are being operated in compliance with applicable law."

The Office of Financial Research (OFR) at the U.S. Department of the Treasury released its "2013 Annual Report, which "identifies threats to financial stability and tools to monitor them." The report contains a number of mentions of money market funds, asset managers and short-term funding markets. It says, "The Office and the Council continue to highlight financial stability risks related to securities financing transactions in repos (repurchase agreements) and other short-term funding markets. These markets are still exposed to the risk of runs and fire sales. Vulnerabilities remain in money market funds and similar sources of cash in these markets. In our report, Asset Management and Financial Stability, we drew attention to a related risk -- a rapid unwinding in response to market shocks of the reinvestment of cash collateral in securities lending transactions. Financial entities that engage in leveraged carry trades (borrowing short-term to invest in long-term assets) are particularly vulnerable."

The report continues, "Gaps still remain in the U.S. and global macroprudential toolkits. `For example, although regulators have begun to address vulnerabilities leading to the risk of runs on repo and money market funds, we believe that better tools are needed. Also, as noted in a recent OFR working paper, stress testing of large bank holding companies in the United States -- a valuable exercise used to determine regulatory capital and liquidity planning at these institutions -- could be improved by incorporating funding risks, potential spillovers, and feedback effects."

The OFR tells us, "The Office's framework for monitoring focuses on vulnerabilities in the financial system rather than shocks to it. Vulnerabilities are determinants of instability; shocks expose them. Examples of vulnerabilities include the potential for runs in money market funds that promise a fixed net asset value; lax loan underwriting standards; a rapid buildup of credit; insufficient bank capital or liquidity buffers to absorb losses or withdrawals; and excessive maturity transformation promoted by a period of low interest rates. Vulnerabilities may arise through market failures, incentives that lead to excessive risk-taking."

The latest Annual Report discusses, "Wholesale Funding Market Run Risk and Fire Sales," saying, "In past reports, the Office and the Council have each highlighted financial stability risks related to repo markets. Regulators and market participants have made progress in reducing vulnerabilities in the repo markets to runs and asset fire sales. Concentration has declined, collateral quality has improved, the volume of intraday credit has decreased, and some repo maturities have extended. Potential ways to mitigate remaining risks in repo markets include the creation of an orderly liquidation facility, limitations on collateral types, an extension of repo maturities, and minimum collateral haircuts. These changes would enhance the macroprudential toolkit, although their extension to transactions between unregulated entities and harmonization with non-U.S. markets would need to be addressed."

It continues, "Secured funding markets are still exposed to potential repo runs, which could amplify and transmit risk systemwide. Run risk stems from three current weaknesses. First, broker-dealers and others who obtain financing in the repo market are vulnerable to runs by counterparties. The Securities and Exchange Commission has proposed requiring prime money market funds to adopt floating share prices or impose liquidity fees or restrictions on withdrawals that could help reduce the likelihood of runs, but this system has yet to be tested (see FSOC, 2012b, and SEC, 2013a). Figure 5 illustrates the vulnerability of prime money market funds to counterparty failure. The most vulnerable funds would break the buck -- fall below the $1 per share net asset value by more than half a cent -- if any one of 30 or more counterparties defaulted; the less vulnerable funds would break the buck if any one of 10 to 19 counterparties defaulted. Figure 6 illustrates the connections of the largest money market funds to the institutional issuers whose securities they hold. In addition, forced asset (fire) sales are a risk if cash providers (such as money market funds) withdraw cash and collateral providers (typically broker-dealers) are unable to finance their positions. Finally, contagion risk could aggravate and extend such asset sales if the inability to unwind illiquid assets adds pressure on other securities and market participants."

Finally, the report adds, "Progress in addressing these risks for financial institutions has been mixed. The total and repo liabilities of shadow banking entities have declined significantly since the financial crisis (see Figure 7). However, mortgage real estate investment trusts (REITs) -- leveraged investment vehicles that borrow shorter-term funds in the repo market and invest in longer-term agency mortgage-backed securities (MBS) -- have not followed this trend." Watch for more excerpts in the coming days, or see the full report here.

PwC Ireland's most recent asset management regulatory newsletter, "Regulatory Times" features an update on Money Market Funds (see page 7). It tells us, "The European Commission (EC) tabled [unveiled] its proposed Regulation on money market funds (MMFs) on 4 September 2013. Caught in the headlights of pan-EU regulations for the first time, the new regime introduces a host of requirements for MMFs from risk management to data collection. Essentially, the proposed Regulation is designed to ensure that MMFs can better withstand redemption pressure in stressed market conditions, by enhancing their liquidity profile and stability. The idea is that this should help to secure their important financing role for the economy. MMFs would be obliged to hold at least 10% of their assets in instruments that mature on a daily basis and an additional 20% of their assets in instruments that mature within a week."

The PwC piece continues, "The EC is concerned about the interconnectedness of MMFs and the banking sector. According to the EC, nine out of the 10 largest MMF managers are sponsored by commercial banks. The EC also worries about the concentration of MMF assets. It says that the 200 largest MMFs account for more than 86% of the aggregate assets MMFs hold. The EC's proposal addresses concerns raised by a European Systemic Risk Board (ESRB) recommendation issued on 20 December 2012. The ESRB recommended moving to a mandatory variable net asset value (NAV) which it believes would reduce shareholders' incentive to withdraw funds when a fund experiences a modest loss. The ESRB also recommended imposing explicit minimum amounts of daily and weekly maturing liquid assets."

It adds, "The EC has responded explicitly to the majority of the ESRB's recommendations, although it hasn't adopted a mandatory variable NAV. But arguably the same policy objective will be achieved through the specific capital requirements placed on constant NAV (CNAV) funds. Key proposals in the Money Market Fund Regulation (MMFR): CNAV MMFs must hold a capital buffer of at least 3% of total assets, composed only of cash. MMFs must hold at least 10% of their portfolio in assets that mature within one day and another 20% that mature within one week. MMFs can only invest in four categories of financial assets: money market instruments, deposits with credit institutions, financial derivatives (largely only for hedging purposes and provided strict conditions are met) and reverse repurchase agreements. MMFs must abide by new 'know your customer' requirements, to equip them for better anticipation of redemption cycles. MMFs must comply with detailed rules on the diversification of assets, such as upper limits on how much a single issuer can represent as the MMF's assets." (See the "Link to EU proposed regulation.)

PwC tells us, "The number of MMFs in Europe and the US has radically reduced in the past couple of years, and the market is likely to shrink further if the EU's proposed regulatory requirements are adopted. While the EC's proposals may change, the current proposals would have a significant impact on the MMF industry, particularly on CNAV funds. The MMF industry believes the proposal will effectively kill off CNAV MMFs. The International Money Market Funds association suggests that a requirement to hold a capital buffer of 3% is "simply uneconomic" so, if the proposals were implemented, CNAV providers would convert their fund to variable NAV. The proposals have already come under heavy criticism from the European asset management industry."

They explain, "The European Parliament's Committee on Economic and Monetary Affairs ("ECON") issued a report dated 15 November 2013 (the "ECON Report") which proposes amendments to the Draft Regulation. The most significant proposal is that five years after the Draft Regulation enters into force, all MMFs that operate with a constant net asset value ("CNAV") established, managed or marketed in the EU must be converted into variable net asset value ("VNAV") MMFs." (See the Link to ECON report here.)

Finally, PwC writes, "A committee of the European Parliament is scheduled to undertake the first reading of the Draft Regulation and the ECON Report (and vote thereon) on 12 February 2014. Under the EU's ordinary legislative procedure the proposal will then be considered by the full European Parliament at its plenary session on 15 April 2014. These dates may change."

We learned from an article entitled, "JP Morgan Asset Management to merge liquidity funds" from EFinancial News that JPMAM will merge its Luxemburg-domiciled E856 million Euro Government Liquidity Fund into the E11.4 billion Euro Liquidity Fund. (Euro money market funds are only available to non-U.S. investors and are used primarily by European institutional investors and multinational corporations.) A document posted Friday on JPMAM's www.jpmgloballiquidity.com website, entitled, "Euro Government Liquidity Fund merger with Euro Liquidity Fund Q&A, says, "The Board of Directors of JPMorgan Liquidity Funds has decided to merge the following sub-funds on 14th February 2014: Merging sub-fund, JPMorgan Liquidity Funds – Euro Government Liquidity Fund; Receiving sub-fund, JPMorgan Liquidity Funds – Euro Liquidity Fund AUM E948.7M as at 29 November 2013 AUM E11.100B as at 29 November 2013."

The Q&A asks, "Why are we merging these sub-funds and what are the potential benefits to clients?" They explain, "The Euro Government Liquidity Fund was closed to subscriptions and switches in when the European Central Bank ("ECB") reduced the deposit rate to zero percent in July 2012. As a result of the prolonged ultra-low interest rate environment, the Board has decided to merge the Euro Government Liquidity Fund with the Euro Liquidity Fund. With its broader investment universe, it is believed that the Euro Liquidity Fund is better positioned to achieve a positive net yield in the future."

JPMAM Europe continues, "How does the strategy of the receiving sub-fund differ from the strategy of the merging sub-fund? The Euro Government Liquidity Fund has exposure to Euro-denominated debt issued by European governments, agencies and supranational institutions. The Euro Liquidity Fund has some exposure to European Governments, agencies and supranational institutions, but in addition takes exposure to Euro-denominated corporate and financial debt."

They add, "What options do I have as a shareholder? If you agree with the merger, no action with regard to your holdings is necessary. If you do not agree with the merger, you have the following options available: „„Switch your holdings into other sub-funds in the J.P. Morgan Asset Management range of funds. „„Redeem your holdings in the sub-fund and withdraw their proceeds. We recommend that shareholders seek independent tax and investment advice before making any final decision around their holdings affected by the merger."

JP Morgan's Q&A adds, "What is happening with respect to interest rates in the Eurozone? The ECB reduced the deposit rate to zero percent in July 2012. In November of this year it lowered the main refinancing rate to 0.25% while leaving the deposit rate at zero percent and maintained the forward guidance that it is prepared to keep rates at their current or lower levels for an extended period. It has further indicated that it has not ruled out a move into negative deposit rates."

Crane Data's Money Fund Intelligence International, which tracks "offshore" money market funds based in Dublin and Luxemburg, tracks 23 Euro-denominated money market funds (not available to U.S. investors) with E73.4 billion in assets; just 4 of these investing exclusively in "government" securities. (BlackRock, Goldman Sachs and RBS also have Euro MMFs.) Assets in Euro MMFs have declined from E88 billion at the start of 2013, and have declined from E108 billion since the start of 2012. Finally, note that we also published our latest MFI International "Offshore" MF Portfolio Holdings, with data as of Nov. 30, on Saturday.

In an odd coincidence, both Fitch Ratings and Moody's Investors Service published 12-page reports entitled, "2014 Outlook: Money Market Funds." Both have stable ratings outlooks on the sector and focus on pending regulatory changes and further consolidation, but Moody's also discusses low yields and profitability while Fitch comments on corporate cash and shrinking supply. Fitch writes in its press release, "Fitch Ratings says its rating outlook for money market funds (MMFs) globally is stable for 2014, underpinned by funds' conservative, active management of credit, market, and liquidity risks. The outlook also reflects the status quo with respect to MMF regulations globally, as Fitch believes that any regulatory reform will take time to implement."

They continue, "Regulations proposed for MMFs, if enacted, would have far-reaching implications, affecting funds' terms and investment strategies, both in the US and Europe. Most managers have been proactively reviewing their offerings and exploring alternative liquidity products, as the appetite for convenient and diversified investment solutions will persist. Nevertheless, regulatory changes could pressure certain funds in terms of unexpected redemption activity."

Fitch tells us, "The next US debt ceiling deadline may arise between March and June 2014, and could again create liquidity pressure on MMFs denominated in US dollars. MMFs will likely implement strategies similar to those they applied ahead of the October 2013 debt ceiling deadline prior to its resolution, primarily by building up liquidity buffers. It turned out that investor redemptions were relatively muted in September and October, resulting in limited liquidity pressures on the funds."

They explain, "Regulatory and political changes are also causing the supply of eligible investments for MMFs to decrease. For example, evolving assumptions on sovereign support for banks may further reduce the number of Tier 1 rated banks. In response, managers are venturing into newer markets and approving new issuers. Managers are also increasingly investing in innovative money market products, such as callable commercial paper (CP), collateralised CP and repo backed by non-government collateral."

Finally, Fitch writes, "The low interest rate environment is expected to persist in 2014, and will continue to present MMF managers with operational and profitability challenges. Given the importance of scale in this market, we expect additional industry consolidation, particularly in Europe. While MMF assets under management predominantly reside in the US and Europe, MMF products continue to grow in other markets. Portfolio guidelines for MMFs in these markets are converging with current US and European standards. Nevertheless, emerging market short-term markets can exhibit greater volatility, as observed, for example, in China."

Moody's says in their piece, "Our outlook for money market fund (MMF) ratings is stable. We do not expect significant shifts in MMFs' credit or stability profiles over the next year. Fund managers remain cautious in the face of persistent supply constraints, potential shifts in monetary policy, political gridlock in the US and Europe, and looming regulatory reform."

They continue, "The biggest story in 2014 will likely be the finalization -- or near finalization -- of new MMF regulations in both the US and Europe. Regulatory reforms that were proposed in 2013 will likely result in dramatic changes to the MMF product, to investor preferences, and transform the industry as a whole. Overall, regulatory changes will serve to protect MMF investors by addressing structural vulnerabilities and attempting to reduce systemic risk associated with MMFs."

Moody's adds, "The low interest rate environment will continue to pressure fund yields and MMF managers' profitability. Persistent low rates will drive more investors out of MMFs in both Europe and the US, and will push fund managers to maintain "barbelled" portfolio strategies. MMFs that implement such "barbelling" strategies -- focusing simultaneously on both the low and high ends of a credit and/or maturity range -- will have greater pressure on their credit and stability profiles."

Finally, they write in their summary, "Profitability pressures will drive further industry consolidation. Fee waivers, a function of low gross yields, will continue to be a drag on asset managers' revenues and earnings. New compliance and operational requirements in regulatory reform proposals will add further expense to MMF managers' cost structures, strengthening the advantages of large players with more scale and broader client relationships. The trend towards greater industry concentration will continue in 2014 as more small- to medium-size players exit the market or sell out to larger MMF aggregators."

Crane Data released its December Money Fund Portfolio Holdings data earlier this week, and our latest collection of taxable money market securities, with data as of Nov. 30, 2013, shows a jump in Certificates of Deposits (CDs) and Treasuries, but drops in Repurchase Agreement (Repo) and Treasuries. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) decreased by $10.7 billion in November to $2.452 trillion. (Assets again shifted from Government and Treasury funds into Prime funds on concerns over the Treasury debt ceiling.) Portfolio assets declined by $9.4 billion in October, but rose by $55.3 billion in Sept., $1.1 billion in August and $68.9 billion in July. CDs increased their lead as the largest holding among taxable money funds, followed by Treasuries, Repo, CP, Agencies, Other, and VRDNs. Money funds' European-affiliated holdings inched lower to 30.0% on the decline in Repo holdings. Below, we review our latest portfolio holdings statistics.

Among all taxable money funds, Certificates of Deposit (CD) holdings increased $16.6 billion to $535.8 billion, or 21.9% of holdings. Treasury holdings increased by $13.8 billion to $476.8 billion (19.5% of holdings), moving them into second place. Repurchase agreement (repo) holdings dropped $21.3 billion to $453.4 billion, or 18.5% of fund assets. Commercial Paper (CP), the fourth largest segment, fell by $5.0 billion to $412.4 billion (16.8% of holdings). Government Agency Debt fell by $15.7 billion; it now totals $342.3 billion (14.0% of assets). Other holdings, which includes Time Deposits, increased $2.2 billion to $183.9 billion (7.5% of assets). VRDNs held by taxable funds dropped by $1.2 billion to $47.0 billion (1.9% of assets). (Crane Data's Tax Exempt fund data will be released in a separate series tomorrow.)

Among Prime money funds, CDs still represent about one-third of holdings, or 34.2%, followed by Commercial Paper (26.3%). The CP totals are primarily Financial Company CP (15.7% of holdings) with Asset-Backed CP making up 6.1% and Other CP (non-financial) making up 4.4%. Prime funds also hold 6.8% in Agencies, 6.3% in Treasury Debt, 2.8% in Other Instruments, and 5.4% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.567 trillion (down from $1.575T last month), or 63.9%, of taxable money fund holdings' total of $2.452 trillion. Government fund portfolio assets totaled $439.9 billion, down from $445.9 billion last month, while Treasury money fund assets totaled $444.3 billion, up slightly from $441.5 billion in Oct.

European-affiliated holdings decreased by $14.7 billion in November to $734.6 billion (among all taxable funds and including repos); their share of holdings dipped to 30.0%. Eurozone-affiliated holdings inched higher (up $2.5 billion) to $431.5 billion in Nov.; they now account for 17.6% of overall taxable money fund holdings. Asia & Pacific related holdings grew by $7.6 billion to $312.4 billion (12.7% of the total), while Americas related holdings dropped by $4 billion to $1.403 trillion (57.3% of holdings).

The Repo totals were made up of: Government Agency Repurchase Agreements (down $11.9 billion to $207.3 billion, or 8.5% of total holdings), Treasury Repurchase Agreements (down $11.4 billion to $170.9 billion, or 7.0% of assets and Other Repurchase Agreements (up $2.0 billion to $75.3 billion, or 3.1% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $10.0 billion to $246.4 billion, or 10.1% of assets), Asset Backed Commercial Paper (down $2.5 billion to $96.2 billion, or 3.9%), and Other Commercial Paper (up $12.5 billion to $69.7 billion, or 2.8%).

The 20 largest Issuers to taxable money market funds as of Nov. 30, 2013, include: the US Treasury ($476.8 billion, or 21.2%), Federal Home Loan Bank ($204.8B, 9.1%), BNP Paribas ($75.0B, 3.3%), Deutsche Bank AG ($69.5B, 3.1%), Bank of Tokyo-Mitsubishi UFJ Ltd ($63.5B, 2.8%), Bank of Nova Scotia ($63.0B, 2.8%), Sumitomo Mitsui Banking Co ($61.8B, 2.8%), Federal Home Loan Mortgage Co ($61.0B, 2.7%), JP Morgan ($59.6B, 2.7%), Citi ($57.1B, 2.6%), Credit Agricole ($53.5B, 2.4%), Societe Generale ($51.8B, 2.3%), Barclays Bank ($51.5B, 2.3%), Bank of America ($49.8B, 2.2%), Credit Suisse ($48.7B, 2.2%), RBC ($48.6B, 2.2%), Federal National Mortgage Association ($42.7B, 1.9%), Wells Fargo ($39.1, 1.7%), Mizuho Corporate Bank Ltd ($38.2B, 1.7%) and Toronto-Dominion Bank ($35.4B, 1.6%).

The 10 largest Repo issuers (dealers) (with the amount of repo outstanding and market share among the money funds we track) include: BNP Paribas ($48.7B, 10.7%), Deutsche Bank ($44.3B, 9.8%), Bank of America ($38.7B, 8.5%), Barclays ($30.6B, 6.7%), Citi ($29.1B, 6.4%), Societe Generale ($27.9B, 6.2%), Goldman Sachs ($24.9B, 5.5%), Credit Suisse ($23.8B, 5.3%), Credit Agricole and Bank of Nova Scotia ($19.9B, 4.4%).

The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($54.4B, 10.2%), Bank of Tokyo-Mitsubishi UFJ Ltd ($43.0B, 8.0%), Bank of Nova Scotia ($34.3B, 6.4%), Toronto-Dominion Bank ($29.6B, 5.5%), Bank of Montreal ($27.0B, 5.1%), Mizuho Corporate Bank Ltd ($24.9B, 4.7%), Rabobank ($22.4B, 4.2%), Credit Suisse ($18.1B, 3.4%), Citi ($17.5B, 3.3%) and National Australia Bank Ltd ($17.1B, 3.2%).

The 10 largest CP issuers include: JP Morgan ($27.7B, 7.7%), NRW.Bank ($17.3B, 4.8%), Westpac Banking Co ($15.8B, 4.4%), Commonwealth Bank of Australia ($15.8B, 4.3%), General Electric ($12.9B, 3.6%), Societe Generale ($12.9B, 3.6%), FMS Wertmanagement ($12.4B, 3.4%), BNP Paribas ($12.3B, 3.4%), RBC ($11.7B, 3.3%), and Barclays PLC ($11.3B, 3.1%).

The largest increases among Issuers of money market securities (including Repo) in November were shown by: the US Treasury (up $13.1B to $476.8B), Credit Agricole (up $11.8B to $53.5B), Citi (up $8.8B to $57.2B), the Federal Reserve Bank of New York (up $7.5B to $16.3B) and Bank of Nova Scotia (up $5.1B to $63.0B). The largest decreases among Issuers include: Goldman Sachs (down $15.1B to $25.1B), Natixis (down $8.2B to $27.1B), Federal National Mortgage Association (down $8.0B to $42.7B), Federal Home Loan Bank (down $6.9B to $204.8B), and HSBC (down $4.4B to $27.2B).

The United States is still by far the largest segment of country-affiliations with 48.7%, or $1.194 trillion. France remained in second place (9.5%, $232.4B) ahead of Canada (8.5%, $208.1B). Japan was again fourth (7.9%, $194.1B), while Germany (4.6%, $113.5B) moved into fifth place ahead of the UK (4.6%, $112.8B). Sweden (4.0%, $98.4B) ranked seventh, Australia (3.9%, $94.6B) ranked eighth, while the Netherlands (3.0%, $74.6B) and Switzerland (2.5%, $61.4B) continued to round out the top 10. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)

As of Nov. 30, 2013, Taxable money funds held 25.0% of their assets in securities maturing Overnight, and another 10.6% maturing in 2-7 days (35.5% total in 1-7 days). Another 18.6% matures in 8-30 days, while 28.7% matures in the 31-90 day period. The next bucket, 91-180 days, holds 13.2% of taxable securities, and just 3.9% matures beyond 180 days.

Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated earlier this week, and our MFI International "offshore" Portfolio Holdings will be updated Saturday (the Tax Exempt MF Holdings will be released tomorrow). Visit our Content center to download files or visit our Portfolio Laboratory to access our "transparency" module and contact us if you'd like to see a sample of our latest Portfolio Holdings Reports or our new Weekly Money Fund Portfolio Holdings collection.

Though the long-awaited Volcker Rule appears to have minimal direct impact on money funds and the money markets, there are a coupe areas where funds may be impacted. Citi's Vikram Rai wrote yesterday in a "Short Duration Strategy" Alert, an update entitled, "Final Volcker Rule Largely Positive for ABCP But Snags Some Conduits." He says, "Under the proposed Volcker rule, ABCP conduits would not have been covered by the loan securitization exclusion and would have been deemed covered funds. The Agencies have determined in the final rule to exclude from the definition of a covered fund an ABCP conduit that is a "qualifying asset-backed commercial paper conduit"." We excerpt from his piece below, and also quote from the ICI's Comment on the Volcker Rule.

Rai explains, "A qualifying ABCP conduit needs to meet the following requirements: The conduit must hold only a) Loans or other assets that would be permissible in a loan securitization and; b) Asset-backed securities that are supported solely by assets permissible for a loan securitization and are acquired by the conduit as part of an initial issuance directly from the issuer or directly from an underwriter. The conduits must issue only asset-backed securities, comprising of a residual and securities with a term of 397 days or less."

He adds, "A "regulated liquidity provider," must provide a legally binding commitment to provide full and unconditional liquidity coverage with respect to all the outstanding short term asset-backed securities issued by the qualifying asset-backed commercial paper conduit in the event that funds are required to redeem the maturing securities."

Citi adds, "Given that the exclusion is not available to ABCP conduits that lack full liquidity coverage, partially supported ABCP conduits will need to be restructured to conform to the requirements of qualifying ABCP conduits. While this affects a large portion of currently outstanding ABCP conduits, the process of converting a partially supported program into a fully-supported one is not overly complicated and typically requires that the liquidity coverage not remain limited to funding only performing loans, receivables or asset-backed securities."

Finally, Rai writes, "Thus, we expect the ABCP market to be able to adapt to this requirement and given that the uncertainties around the impact of the Volcker rule have cleared up, we have a more positive outlook on the future of this market."

ICI's Paul Stevens comments, "At more than 900 pages, it will take some time to understand the full scope and impact of the final Volcker Rule. Among the many concerns ICI has voiced about the Rule, the most important was the need for regulators to make clear that the Rule does not affect the organization or activities of U.S. registered investment companies (RICs) because of the negative impact that could have on investors."

He continues, "Our initial review indicates that regulators appear to have heard our concerns. While we continue to examine the details, we appreciate the effort the agencies have made to tailor the final Rule's definition of covered funds to exclude both U.S. RICs and regulated non-US retail funds. We believe this is what Congress intended."

Finally, Stevens adds, "More broadly, we remain concerned about a yet-unknowable outcome: the impact this rule will have on capital markets. Mutual funds and their counterparts around the world depend on liquid markets in which to trade efficiently on behalf of their shareholders. We will be watching this aspect of the Volcker Rule carefully and will communicate with regulators and Congress about any adverse effects on registered funds and their shareholders. We further urge regulators to continue to work together, as they did in the development stage, as the Rule moves into the implementation and enforcement phases in the months and years ahead."

As we mentioned Friday, our latest Money Fund Intelligence newsletter discusses the rebound in money fund assets over the past 6 months, which has continued into December, and the breaking of the $2.7 trillion level. Our lead December article, "Money Fund Assets Retake $2.7 Trillion; Flat Again in '13," says, "Money market mutual fund assets will be up slightly, but basically flat, for the second year in a row in 2013. However, these minor gains (up $24B YTD and up $10B in 2012) were the result of big declines in the first half of the year, followed by strong growth in the second half. This is a similar pattern to what we saw in 2012. But it's unclear whether this is a change in seasonality or is due to special factors."

MFI explains, "Money fund assets rose by $24 billion in the latest week, according to ICI's numbers, retaking the $2.7 trillion level for the first time since the first week of 2013. Assets have only poked up above $2.7 trillion for the first couple of weeks in January in both 2013 and in 2012. They had first broken above this level in the summer of 2007 and remained above it until mid-2011." (See the annual asset level chart on page 2 of MFI, and assets over the past 2 years on page 1.)

The piece continues, "In both 2012 and 2013, we saw declines in the first five months of the year. This year we've seen consistent asset growth since June 30, whereas in 2012 the rebound was concentrated in the last two months of the year. While the latter was likely driven by shifting dividends and income to avoid tax increases and the expiration of the TAG (unlimited FDIC insurance) program, the reason's behind this year's comeback are less clear."

Finally, MFI explains, "Losses in bond funds around mid‐year and continued outflows from bond funds could be the big factor. ICI shows over $150 billion in outflows from these funds since June 30. Since the start of 2011, bond funds had taken in over $550 billion. This could be just a taste of things to come once the Fed's "taper" begins and once markets begin anticipating an eventual hike in short‐term rates. Thus, while the strong headwinds of zero rates and pending regulatory changes loom, money funds once again may find themselves with reasons to celebrate at year‐end 2013. Happy Holidays, and hang in there!"

Month-to-date in December, Crane Data's MFI Daily shows that money fund assets increased by $19.8 billion last week (through Friday, 12/6). Watch for more coverage of MFI in coming days, and watch for our "Market Share" and Money Fund Portfolio Holdings to be released later Tuesday.

Wells Fargo Advantage Money Funds' latest Portfolio Manager Commentary "Overview, strategy, and outlook" discusses the Treasury's pending FRN program. It tells us, "On November 6, the U.S. Treasury announced it would conduct its first auction of floating-rate notes (FRNs) on January 29, 2014. This is a notable event because it is the Treasury's first new product in 17 years. The FRNs will have a maturity of two years and an interest rate that resets daily based on the most recent 13-week Treasury bill (T-bill) auction rate plus or minus a spread that is set at the auction. The first auction is expected to be for an amount of $10 billion to $15 billion, with additional sales of the same issue, called reopenings, at the end of each of the next two months, for a total issue size of perhaps $40 billion. This auction schedule would allow for four distinct maturities, totaling in excess of $150 billion, to be issued each year."

Wells explains, "There will be a period of price discovery in the initial auctions, as some investors seek an early-adopter discount while others may wait for the dust to settle before becoming involved. Buyers are expected from the usual population of T-bill and other short-term Treasury investors, including money market funds, central banks, and entities needing high-quality liquid assets (HQLA) to meet the various upcoming regulatory requirements we discussed in last month's commentary."

They continue, "This leads to an important realization about the FRNs: despite being new and exciting, they aren't likely to significantly change either the supply or demand dynamic in U.S. government money markets. As mentioned above, the demand from buyers who want, or need, to own Treasuries will continue to be robust. On the supply side, the Treasury's total issuance is always based on its cash needs, meaning the cash raised by issuing FRNs will come at the expense of issuing other instruments. Given the Treasury's drive to extend the average maturity of the country's debt during this post-financial crisis period of heavy deficits, FRN issuance seems most likely to replace T-bill issuance. This brings up the interesting point that the Treasury has the opportunity to influence the 13-week T-bill auction rate by shrinking the auction size. Investors could pick up additional yield in the FRNs' spread to the index but give some yield back down the road as the index may be lower than it otherwise would be due to a scarcity of T-bills."

Wells writes, "When it all shakes out, FRNs will probably be yield-positive for investors who buy them in lieu of T-bills. FRNs are a longer-term instrument than the T-bills they replace, so they should yield more. As a risk-free instrument, credit shouldn't be a concern, but gauging the correct yield spread for two years will be more challenging. On that note, the Continuing Appropriations Act, 2014 suspended the debt limit for the U.S. until February 7, 2014, just one week after the first FRNs are due to settle. Depending on the temperature of the topic in the news at that time, this may affect the initial FRN auction as well. Questions about creditworthiness could lead some to avoid the auction, but conversely, the FRNs could be seen as more desirable than T-bills as their final maturity is far in the future, long past any political wrangling from the current episode."

Finally, they say, "Although these new FRNs won't materially change the supply/demand dynamic, for investors who are limited by their charters to investing in U.S. Treasury obligations, this new product is, in fact, pretty exciting. For Treasury-only money market funds, this is very friendly for the weighted average maturity (WAM), which is limited to 60 days, because the interest-rate reset of one day allows them to mark the maturity in a corresponding manner for this calculation, which will push a fund's WAM lower. A constraining effect, however, is the FRN's final maturity of two years, which will push a fund's weighted average final maturity (WAFM) much higher. With a fund's WAFM capped by SEC Rule 2a-7 at 120 days, this means a fund could only put a maximum of 16% of its assets in two-year FRNs if the rest of the fund was strictly in overnight investments. Given these factors, Treasury-only funds are likely to want to buy the FRNs for additional yield and their lowering effect on WAM but will be limited to a fairly small involvement due to the WAFM restrictions. Prime funds and government funds able to invest in more than just Treasuries are likely to be less motivated to buy the FRNs given their access to higher-yielding alternatives."

The December issue of Crane Data's Money Fund Intelligence was sent out to subscribers on Friday morning. The latest edition of our flagship monthly newsletter features the articles: "Money Fund Assets Retake $2.7 Trillion; Flat Again in '13," which reviews the growth of money fund assets over recent months and cycles of 2012 and 2013; "Northern Rethinks Cash: Interview with Peter Yi," which discusses money markets and enhanced cash with the Chicago manager; and, "MMF MNAVs Not Floating," which reviews the disclosure of market net asset values since the beginning of 2013. We've also updated our Money Fund Wisdom database query system with Nov. 30, 2013, performance statistics and rankings, and will be sending out our MFI XLS shortly. (MFI, MFI XLS and our Crane Index products are available to subscribers at our Content center.) Our November 30 Money Fund Portfolio Holdings are scheduled to go out on Tuesday, Dec. 10.

Our MF Assets piece says, "Money market mutual fund assets were basically flat for the second year in a row in 2013. But the miniscule gains masked a huge decline then comeback this year, a pattern similar to what we saw in 2012. Money fund assets rose by $24 billion in the latest week, according to ICI's numbers, and retook the $2.7 trillion level for the first time since the first week of 2013."

The December issue's lead story continues, "Assets have only peaked above $2.7 trillion for the first couple of weeks in January in both 2013 and in 2012. They had first broken above this level in the summer of 2007 and remained above it until mid-2011. (See the annual asset level chart on page 2, and assets over the past 2 years below.)"

Our "profile" with Northern's Peter Yi says, "This month Money Fund Intelligence interviews Peter Yi, Senior Vice President and Director of Money Markets at Northern Trust. Northern is the 11th largest manager of money funds in the U.S., but its footprint in the cash marketplace is even larger given its management of securities lending reinvestment and other cash pools. Our Q&A follows."

We write: "MFI: How long has Northern been involved in running money funds?. Yi: Northern Trust has been managing money market funds since the 1970's when Northern created its first cash sweep vehicle in our trust department. We have been doing this for a long time and continue to be very committed to the money market business. We are now managing about $225 billion in AUM across various money market and short duration products and strategies.."

The article on MMF MNAVs explains, "Two of the major stories of 2013 included the SEC's money market fund reform proposal, which contained a floating NAV option for prime institutional money funds, and the voluntary disclosure of daily market NAVs by a number of institutional money fund managers. Given that we now have almost a year of history of these daily MNAVs, and a 2-year history of the monthly "shadow" NAVs, we decided to look at whether money funds do indeed actually float. Given the minimal fluctuation in these values to date, it's pretty clear that the answer is "No."

Finally, we're making preparations for our "basic training" conference event, Crane's Money Fund University, which will be held Jan. 23-24, 2014 in Providence, Rhode Island. Our 4th annual MFU will contain a heavier focus on money fund regulations, and will, as always, cover the basics of money funds, interest rates, and overviews of various money markets. Our next main event, Crane's Money Fund Symposium, will take place June 23-25, 2014, in Boston, and our second annual "offshore" event, European Money Fund Symposium, will take place Sept. 23-24 in London. Registrations and sponsorships are now being accepted for our 2014 Symposium, and the preliminary agenda is being finalized. (Watch for the agenda later this month.)

S&P published a release entitled, "New U.S. Treasury Floating-Rate Notes Are Consistent With Our Principal Stability Fund Ratings Criteria" yesterday. It says, "Standard & Poor's Ratings Services today said that the new U.S. Treasury floating-rate notes (FRN) are consistent with our principal stability fund ratings criteria and, as such, would not be classified as a higher-risk investment. On Nov. 6, 2013, the U.S. Treasury announced final details of its initial FRN issuance that will take place Jan. 29, 2014. Representing the first new Treasury security introduced since inflation-protected securities 17 years ago, the initial FRN auction is expected to be $10 billion to $15 billion in size, with a maturity of two years."

The statement continues, "According to the Treasury, auctions of the FRNs will be conducted similar to other Treasury securities auctions. As such, the Treasury expects to offer the FRNs on a quarterly basis in addition to two monthly reopening auctions. The FRNs will accrue interest based on a rate comprised of the 13-week auction High Rate from the previous 13-week Treasury bill auction (the reference or index rate) and a spread that the Treasury will determine at the initial FRN auction."

S&P explains, "We have received inquiries in anticipation of the first issuance about how we would treat it under our current principal stability fund ratings criteria. We released our criteria for rating principal stability funds, also known as money market funds, on June 8, 2011 (see "Methodology: Principal Stability Fund Ratings," published on RatingsDirect). In our view, the 13-week auction High Rate is consistent with our criteria and, as such, we would not classify the newly issued Treasury FRNs as a higher-risk investment."

In other news, Federal Reserve Bank of New York Executive VP Simon Potter gave a speech Monday entitled, "Recent Developments in Monetary Policy Implementation," to New York University's "Money Marketeers," a group of economists. He said, "My remarks this evening will focus on the role played by the New York Fed's Trading Desk (the Desk) in the implementation of monetary policy and how our operational tools have evolved in recent years. I'll focus in particular on the potential use of overnight, fixed-rate reverse repurchase agreements, also known as reverse repos, which we began testing in September. We've been testing this instrument to support the Federal Open Market Committee's (FOMC) longer-run planning for the implementation of monetary policy, and its development shouldn't be interpreted as a signal of the FOMC's intentions for monetary policy or the path or timing of any future change in the level of policy accommodation."

Potter explained, "An important point to observe is that the rate for which the FOMC sets a target, the overnight federal funds rate, represents an unsecured lending rate between banks. But the Desk conducted its operations with its primary dealer counterparties -- government securities dealers that have an established trading relationship with the New York Fed—in the secured financing market for general collateral repurchase agreements, or GC repos. This market serves as a hub in which broker-dealers and other market participants finance their inventories of securities, frequently borrowing from cash-rich investors, such as money market funds. These financing arrangements are structured as repos, in which the security is technically sold with an agreement to repurchase at an agreed-upon later date. The transaction can be thought of in most respects as economically similar to a collateralized loan. The growth of the GC repo market in recent decades has reflected the greater issuance of marketable securities in the United States, and the repo market and the broker-dealers, through their intermediation, support the healthy functioning of the markets for such securities."

He continued, "The crisis brought on several important changes in the conduct of monetary policy with implications for money markets. The first was the easing in the stance of monetary policy, with the FOMC's reduction in its fed funds target from a point target of 5 1/4 percent in mid-2007 to a target range of zero to 1/4 percent by December 2008, where it remains today. The second change was a shift to liquidity and monetary policy operations that resulted in a high level of excess reserves. In the initial year or so of the crisis, the Desk offset the reserve-adding nature of the Federal Reserve's loans to support the liquidity of a range of financial institutions and to foster improved conditions in financial markets by reducing other assets on the Fed's balance sheet, notably holdings of short-term U.S. Treasury securities. By September 2008, however, amid a deepening crisis and widening policy response, the capacity to offset completely the increase in the balance sheet was effectively exhausted. Consequently, additional credit provision and the initiation of large-scale asset purchase programs, the latter of which continue today to support continued progress toward maximum employment and price stability, began and continue to cause reserve balances to grow."

Potter added, "A third and related change in the conduct of monetary policy was the introduction of our ability to pay interest on reserve balances held by depository institutions. Congress granted this authority to the Federal Reserve in the Financial Services Regulatory Relief Act of 2006, with an October 2011 effective date, but accelerated its implementation to October 2008 as part of the legislative response to the financial crisis. In particular, the ability to pay interest on excess reserves, or IOER -- that is, reserve balances held by banks above the level of reserves they're required to hold -- enhanced the Federal Reserve's ability to control short-term interest rates amid its reserve-expanding credit programs and asset purchases. Without payment of interest on reserves, short-term interest rates could fall to zero or negative levels given the increased level of reserve balances. Interest on reserves represents the rate of return on a riskless overnight deposit at the Fed. Accordingly, the interest rate paid on reserves represents the sure return a bank can earn and therefore the opportunity cost for the bank to make an alternative investment, such as a loan or the purchase of a security. Theoretically, if all money market participants had access to deposits earning the IOER rate, the IOER rate should set a minimum rate -- or floor, so to speak -- on short-term interest rates, as there would be no incentive for institutions to make loans to any institution at a lower rate."

Finally, he commented, "Money market dynamics in recent years generally reflect these changes. In a world with significantly elevated reserve balances and a 1/4 percent interest rate paid on those balances, IOER has kept the federal funds rate and other money market rates at positive levels within the FOMC's zero to 1/4 percent target range. Contrary to the dynamics one would expect of an idealized perfect market, however, short-term rates have consistently traded at levels below the IOER rate, and Treasury bill and repo rates have occasionally gone negative, particularly when financial stresses increase the demand for very safe assets. Since IOER is available only to depository institutions holding balances at the Fed, many other money market participants cannot access it, either because they don't earn interest on Fed account balances (like government-sponsored enterprises, or GSEs) or don't have Fed accounts at all (like money market funds). Without such access, these institutions may have less bargaining power and may have to leave funds unremunerated at the Fed or place funds in the market at sub-IOER rates. This creates a potential arbitrage opportunity for banks, which can earn a spread between their costs of funds and their earnings on reserves, but not for other cash lenders.... Thus, while banks take some advantage of the arbitrage opportunity, competitive conditions in the unsecured money markets haven't proven strong enough to narrow the spread between the fed funds rate and the IOER rate to very small and stable levels, and the floor on rates that IOER is meant to provide appears soft."

We learned from Joan Ohlbaum Swirsky and John Baker of Stradley Ronon Stevens & Young, LLP that the SEC has posted its fall regulatory agenda which indicates that money fund reform should be completed by October 2014. Swirsky explained to Crane Data, "The fundamental reform of money market funds is scheduled to be finalized in 10/14. Also interesting is that almost all of the final rules are scheduled to be finalized 10/14. That makes the date seem like somewhat of a placeholder, to keep the items on the agenda for the year, but allow substantial time to finalize the item."

She adds, "The removal of ratings from Rule 2a-7 is scheduled to be finalized 12/13 (this month. Regulatory actions often are pushed beyond the date on the agenda. But even if that initiative falls behind by a few months, it appears it may occur before the fundamental reforms are finalized. I should mention that the agenda is non-binding, and it is not uncommon for items to fall behind the stated schedule. But it is difficult to imagine that the SEC will issue almost no final rules until 10/14."

Stradley's Baker explained in a statement, "The Securities and Exchange Commission's Fall 2013 regulatory agenda is now available on reginfo.gov. The SEC, like other federal agencies, publishes its regulatory agenda twice a year. The agenda is a preliminary statement, prepared by the staff as of November 5, 2013. While the agenda is entirely nonbinding and should not be given too much weight, and in particular the target dates are almost always wrong, it does give some sense of the staff's thinking as to which regulatory initiatives are under consideration and whether action is likely soon or only in the more distant future. The agenda includes only initiatives on which action is expected over the next twelve months."

He continued, "The agenda contemplates final action in December 2013 to remove references to credit ratings in Investment Company Act of 1940 rules and forms. Other rulemakings involving the 1940 Act, however, have target dates of October 2014, essentially conveying that these matters are currently under consideration and may see action over the next year, but action is unlikely in the next few months. These rulemakings include money market fund reform, exchange-traded fund exemptive relief, regulation of private placements under the JOBS Act, amendments to the forms used by funds to report fund operations and portfolio holdings, and enhanced disclosure for separate accounts offering variable annuities."

Finally, Baker adds, "It can also be significant when items are dropped from the rulemaking agenda. The Spring 2013 agenda stated that the Division of Investment Management was considering recommending that the Commission propose for comment interpretive guidance regarding the valuation of securities and other assets held by investment companies under the 1940 Act. That agenda item is gone, as is the consideration of the standard of conduct for personalized advice by broker-dealers and investment advisers and the plan to issue a concept release toward modernization of beneficial ownership reporting requirements."

Click here to see the SEC's Fall 2013 regulatory agenda. To see the previous Spring 2013 agenda, click here. (Note: Stradley's Joan Swirsky will be presenting on "Money Fund Regulations: 2a-7 Basics & History" at our upcoming Crane's Money Fund University, which will take place Jan. 24-25, 2014, at The Renaissance Providence. Our 4th annual "basic training" event on money market funds will feature a heavier-than-usual regulatory component this year.)

The Federal Reserve Bank of New York posted a brief entitled, "Who's Lending in the Fed Funds Market?. Authors Gara Afonso, Alex Entz, and Eric LeSueur write, "The fed funds market is important to the framework and implementation of U.S. monetary policy. The Federal Open Market Committee sets a target level or range for the fed funds rate and directs the Trading Desk of the New York Fed to create "conditions in reserve markets" that will encourage fed funds to trade at the target level. In this post, we use various publicly available data sources to estimate the size and composition of fed funds lending activity. We find that the fed funds market has shrunk considerably since the financial crisis and that lending activity is now dominated by one group of market participants."

The Fed economists explain, "The fed funds market consists of unsecured loans of U.S. dollars among depository institutions and certain other eligible entities, including government-sponsored enterprises (GSEs). It's no easy matter to gauge the size of the market, as comprehensive data aren't available. However, we can estimate its size and composition by aggregating data from publicly available regulatory filings, such as the FR Y-9C, call reports, and 10-Qs. We collect information from hundreds of institutions and use data from the highest level of each organization to avoid double counting. Although we can't obtain a complete view of the market, our conversations with market participants suggest that these reports capture most fed funds transactions."

It continues, "Our estimates suggest that fed funds lending activity has decreased significantly since the beginning of the financial crisis. As shown in the chart below, at the end of 2012 institutions reported lending over $60 billion in fed funds -- compared with over $200 billion in 2007. Several factors have contributed to this decline in trading volume. For one, the expansion of the Federal Reserve's balance sheet since late 2008 has elevated the level of excess reserves in the banking system. This has reduced the need for many institutions to borrow fed funds to meet reserve requirements and to clear financial transactions. Also, in the fall of 2008 Federal Reserve Banks began paying interest on excess reserves (IOER) to depository institutions. The payment of such interest has reduced the incentives for depository institutions to lend (sell) fed funds at rates below IOER."

In other news, Standard & Poor's distributed a press release entitled, "Report Says EC Money Market Fund Reform Plans Enhance Risk Management But May Not Effectively Reduce Run Risk." It explains, "Proposals by the European Commission (EC) to tighten regulations for money market funds (MMFs) domiciled or sold in Europe could help enhance risk management for most MMF operators and investors in Europe, says Standard & Poor's Ratings Services in a new report: "EC Regulation For Money Market Funds May Have Unintended Consequences."

It continues, "However, the overall size of the European MMF industry may shrink if the regulation is adopted in its current form." S&P's Francoise Nichols comments, "While we think some elements of the proposals are positive for the overall European MMF industry, others may inadvertently make it more difficult for funds to manage risks effectively. They may also increase costs, reduce transparency, and deter investors."

S&P adds, "The EC's proposals, announced in September this year, aim to standardize investment parameters for European MMFs. Furthermore they seek to mitigate the potential systemic risk that European money market funds, which represent close to E1 trillion in assets, might constitute to the stability of the wider European financial system in the event of a run on a fund or the MMF industry. In particular, providers of constant net asset value (CNAV) money market funds, which represent more than 40% of European MMF assets, could suffer considerable economic and operational costs as a result of the EC proposal either to convert them to variable net asset value (VNAV) funds or else maintain a capital buffer of at least 3% as a backstop or reserve to protect against potential losses."

Andrew Paranthoiene tells us, "We believe these providers may lose assets to alternative liquidity management instruments or to CNAV MMFs domiciled outside the EU. The proposed 3% capital buffer applicable to CNAV MMFs could be prohibitive to implement, and could translate in higher operational costs, which fund providers could attempt to pass on to their investors." The release continues, "A significant contraction of MMF assets under management in Europe could also reduce the liquidity of short-term capital markets in Europe, the report says. It would also make funding sources for financial institutions, sovereigns, and non-financial corporations less diversified."

Finally, S&P writes, "In addition, the reform may lead to greater consolidation in the European MMF industry to the detriment of smaller players. This would not just reduce competition, but could also lead to the emergence of a small number of very large MMFs, posing potentially new systemic risks. Standard & Poor's believes that other market-based mechanisms that are not part of the current proposals are also worthy of consideration. These include ensuring that all European MMFs have the possibility to halt investor redemptions at times of market stress, since this could serve the interests of all shareholders and help mitigate run risks."

We wrote last Wednesday about the SEC bringing fraud charges against the now-defunct Ambassador Money Market Fund, its first action involving money market funds since Reserve Primary Fund (see Crane Data's Nov. 27 News, "SEC Charges Ambassador Money Mkt Fund Portfolio Manager With Fraud), and excerpted from the SEC's press release "SEC Announces Fraud Charges Against Detroit-Based Money Market Fund Manager". Today, we excerpt from the full "cease-and-desist" order and examine the issue in more detail. It says, "The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act"), and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ("Investment Company Act") against Ambassador Capital Management, LLC and Derek H. Oglesby (collectively "Respondents")."

The order explains, "After an investigation, the Division of Enforcement alleges that: 1. This case involves misconduct and compliance failures in the operation of Ambassador Money Market Fund (AMMF), a money market fund series offered by Ambassador Funds (Ambassador Funds) and managed by Ambassador Capital Management (ACM). ACM and Derek Oglesby, the portfolio manager principally responsible for AMMF, violated the federal securities laws by repeatedly making false statements to AMMF's Board of Trustees regarding the level of risk in AMMF's portfolio, including statements regarding maturity restrictions, exposure to European issuers, and diversification."

It continues, "In addition, ACM and Oglesby caused AMMF's failure to comply with Rule 2a-7 of the Investment Company Act of 1940, which limits the amount of risk that money market fund portfolios can have. Specifically, ACM and Oglesby caused AMMF's failure to comply with Rule 2a-7's risk limitations by purchasing securities posing more than a "minimal credit risk" under ACM's own guidelines, as well as securities which violated Rule 2a-7's conditions on issuer diversification, and by failing to subject AMMF's portfolio to appropriate stress testing. As a result, AMMF was not authorized to use the amortized cost method of valuing securities (under which it priced its securities at $1 a share) and hold itself out as a money market fund under the Investment Company Act."

The SEC states, "Finally, ACM caused Ambassador Funds' failure to implement adequate written compliance policies under Rule 38a-1 of the Investment Company Act. ACM failed to follow Ambassador Funds' compliance procedures regarding the minimal credit risk determination for securities purchased for AMMF's portfolio. Accordingly, ACM caused Ambassador Funds to violate Rule 38a-1."

The order tells us about the company, "Ambassador Capital Management, LLC is a Michigan limited liability company with its principal place of business in Detroit, Michigan. ACM has been registered with the Commission as an investment adviser since 1998. ACM's advisory clients include governmental entities, pension and profit sharing plans and charities. According to its latest Form ADV, ACM has approximately $1.1 billion in assets under management in 25 accounts. ACM generates income for its clients primarily by investing in fixed-income securities."

It continues, "Derek H. Oglesby, age 36, is a resident of Bloomfield Hills, Michigan. He is a portfolio manager at ACM and a chartered financial analyst. Oglesby was responsible for managing AMMF's portfolio and its day-to-day operations from 2009 until its liquidation in June 2012. Oglesby currently works as Director of Quantitative Research at ACM and is responsible for managing the shorter-term and longer-term portfolios for ACM."

The SEC explains, "Ambassador Money Market Fund (AMMF or "the Fund") was Ambassador Funds' prime money market fund series which operated from 2000 until its liquidation in June 2012. Ambassador Funds is a Delaware business trust with its principal place of business in Detroit, Michigan. Ambassador Funds is an open-end diversified management investment company registered with the Commission since 2000."

The complaint also says, "As of October 2011, AMMF consistently had generated a return which significantly exceeded that for the prime money market funds in its peer group. In addition, AMMF also owned securities issued by Dexia, SA, a French-Belgian bank, after it was taken into receivership by France, Luxembourg and Belgium on October 10, 2011. Further, AMMF held the asset backed commercial paper of a troubled German bank and two Italian issuers. Given these concerns, in November 2011, the Commission conducted a compliance examination of AMMF. During that examination, the Wall Street Journal reported that Moody's issued negative ratings actions on 12 German banks, two of which sponsored asset backed commercial paper held by AMMF. However, ACM's chief investment officer was unaware of these downgrades."

It adds, "ACM has been the investment adviser to Ambassador Funds since 2000. AMMF was Ambassador Funds' money market fund from 2000 until its liquidation on June 30, 2012. Between January 1, 2009 and June 30, 2012, Ambassador Funds made numerous filings with the Commission, on behalf of AMMF, which identified AMMF as a money market fund.... AMMF's total net assets fluctuated significantly during the last several years of its operations. Between 2010 and 2012, the total dollar value of AMMF ranged from a low of $130.9 million to a high of $388 million.... Ambassador Funds paid ACM a management fee of .2% based on the average net daily assets of the Fund. ACM agreed to waive the Fund's expenses, to the extent required, so that the Fund's 1-day yield did not fall below .02%."

Finally, the SEC order states, "AMMF was designed to appeal to Michigan municipalities. In compliance with Michigan law, AMMF was permitted to invest in, among other things, U.S. Treasury instruments, certificates of deposit and asset-backed commercial paper. AMMF generally invested in asset-backed commercial paper. However, after the financial crisis of 2008, the supply of asset-backed commercial paper decreased, which limited the number of investment options available to AMMF. As a result, AMMF's portfolio generally consisted of between 15-25 different holdings. From time to time, more than half of the shareholders' investments in AMMF came from just two municipalities, the City of Detroit and Washtenaw County, Michigan. These municipalities invested in AMMF in order to manage cash in connection with municipal bond offerings and general operations, and in pursuit of liquidity and security.... IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days from service of this Order at a time and place to be fixed, and before an Administrative Law Judge to be designated by further order as provided by Rule 110 of the Commission's Rules of Practice, 17 C.F.R. S201.110."